Rules For Profitable Forex Trading

Forex trading can be risky and can cause substantial financial loss.

However (when trading using a system and following rules) forex trading can be your source of freedom and wealth. It can set you free from your 9-5 job and can bring you more money than you ever imagined.

I will not say that you will become a professional forex trader in a few weeks or months, it takes years to really understand the markets if ever, because no single person will get every trade in their life right. BUT… if you want to make progressive profits as a forex trader, you don’t need to be right 100% of the time. All you need is to be right more than you are wrong, and you will be able to make a living from it.

The biggest reason why the majority of people who start trading forex fail and go broke is because they trade with emotions and no discipline. If you are new to forex and considering trading forex, please take these words of wisdom from me.

PRINT THEM OUT AND HANG THEM NEXT TO YOUR SCREEN!

1- ALWAYS USE A STOP LOSS.

Emotions are out,stops are in.

As a forex trader, stops are your best friend. They will look out for you and help you keep your maxium loss to a very acceptable level. Many beginners make the mistake of holding on to a losing trade, doubling or tripling up and watching their whole account disappear on a single wrong trade. Do NOT do this. Leave your ego at the door, wrong is wrong, be a man and accept the (small) loss. The loss will be small/acceptable if you use a stop loss in accordance with the next rule:

2- Never risk more than 3-5%

of your account on a single trade.

This is how your stops should be set. Adjust your position size so that your stop is at maximum 5% of your account, but when starting out, I recommend no more than 3% account risk on a single trade.

The reason for this is obvious. Using this rule, you can make 33 wrong trades in a row before you blow your account or go broke. You will not lose your account in one or two single trades like so many starting forex traders do. If you have studied technical analysis and apply it to your charts to choose your trades and profit/loss objectives, then it will be rare if you have more than 8 losing trades in a row… very rare.

This rule together with the first one of using a stop is your key to success with forex. Stick to it religiously.

3- Technical Analysis baby!

Trade the charts, not your opinion.

You will hear many old school analysts talking about using fundamental analysis, basing trades on the economy and fundamentals of a country or company. While fundamentals certainly play a role in price action, it is usually over much longer periods of time, and you cannot choose a great entry point based purely on fundamental analysis.

Technical analysis is the study and interpretation of price action on the charts. It is a proven method that really works. In my opinion, technical analysis is the best way to trade forex, using fundamental analysis only for the big,big picture and direction. To clarify it is best to stick to the following definition:
Use Fundamental analysis for the big picture and direction, and use technical analysis to find entry and exit points.

Technical analysis works on finding and using patterns and indicators on charts. Every bit of news is already worked into the price action on the chart. Patterns occur over and over again on charts of all different time frames (minute,hourly,daily,weekly), and these patterns usually resolve in the same way (80-90% of the time).

Of course there are times when a pattern will not resolve as it is supposed to. This is why you use a stop-loss. Trading patterns in the same way every time will leave you a winner over the long run. All you need is to get 6 out of 10 trades correct to be a winner, anything more just results in more profit.

There are many free websites that have technical analysis tutorials.
I recommend Investopedia.

Before starting with forex trading I highly recommend spending at least 2 weeks studying technical analysis full-time. Learn all the chart patterns and indicators, and how to apply them.

2 Great books to learn technical analysis are: (click on the book to buy at Amazon)

4- DO NOT OVER-TRADE.

If you have had a winning session or a few winning sessions, take a break. Just like with anything in life, sometimes with forex trading you get really lucky. you get 3, 5 or 8 winning trades in a row. This is when you should become more careful and not more confident. Don’t let your streak of successes build your ego up into letting you think that you are the best trader in the world and cannot make mistakes.

The biggest danger comes when you think you can step away from your rules of not risking more than 5% of your account on a single trade and when you trade without a stop because you think that your vision is never wrong.

Stay humble and cautious and stick to your trading rules!

If you want to get started with online forex trading, click here to learn more about opening your trading account.